Consumer Action’s statement to the Senate Inquiry into the performance and management of electricity network companies

Consumer Action’s addressed the Senate Inquiry into the performance and management of electricity network companies on 18 February 2015. Our opening address was as follows:

“Thank you for the opportunity to speak to this inquiry.

Our submission provided a potted history of the national reform process which applied to the network regulation of electricity and gas. Our intention in providing this history was to demonstrate that at key points in the policy making and rule making, industry interests were placed ahead of consumer interests. This incorrect focus, we submit, has led to the current situation where there are allegations of inefficient or over-investment in networks, contributing to rising consumer bills.

There is some evidence that the Victorian networks have been more efficient, and the network component of Victorian customer bills have not increased as much, compared to other states. For example, the network cost in Victoria is about a quarter of the bill compared to half in other states. However, this has not stopped the networks using the regulatory system to obtain returns that are higher than efficient – the example of the Victorian networks appealing the Australian Energy Regulator’s determination for distribution pricing during 2011-2015 is case in point. Another is the regulator’s December 2014 decision to approve “excess expenditure” relating to the Victorian smart meter rollout to the tune of $111 million: this means that the cost of the rollout was this much higher than initially budgeted for, but consumers still pay the difference.

As for-profit privately-run businesses, it is natural for these businesses to seek to maximise returns. The point is whether the regulatory regime is sufficient. One proposal put forward in our submission was to consider whether the separation of the Australian Energy Market Commission from the Australian Energy Regulator remains appropriate. We submit that one institution may better focus consumer accountability, and prevent buck passing.

Another option is to have stronger consumer representation in the governance frameworks of these bodies. This is not a novel suggestion. Since the inception of the Australian Competition and Consumer Commission, the position of deputy chair has been filled by a person with extensive expertise in consumer affairs. The current Deputy Chair of the Australian Securities and Investments Commission is similarly qualified. We believe that there should be at least one member of the AER and commissioner of the AEMC that has strong credentials in consumer affairs, representation or advocacy. After all, the objective of these bodies is to promote the long term interests of consumers.

Our submission also noted the changing role of networks, and particularly the role of new technology driving onsite generation and demand side management. We are concerned that the networks are allowed to respond to this by increasing the fixed proportion of the consumer bill, that is, the part of the bill that does not vary with usage. In December 2014, the Essential Services Commission reported that fixed charges have increased 60 per cent since 2009-10, while overall prices increased only 45 per cent—suggesting greater reliance on fixed charges compared to usage charges. More recently, the Society of St Vincent de Paul found that supply charges increased significantly in some network areas in January 2015. For example, it found that Lumo energy customers on a time of use tariff in SP Ausnet’s network area pay a supply charge of $730 per annum, more than $2 per day. This is how much they pay before they consume anything. Increasing supply charges impact low-use households, including low-income pensioner households, those that are efficient, or those with solar panels. We are concerned this issue will become worse in coming years and we submit that it is not efficient for businesses to be able to charge such large fixed supply charges.

Finally, we’d like to conclude with a few comments about the current debate over the AER’s use of benchmarking in the latest round of network determinations. The businesses are strongly critiquing AER’s use of benchmarking, because it is making transparent their inefficiencies. As noted in our submission, we were supportive of 2012 reforms that allowed the AER greater ability to interrogate, review and amend expenditure proposals of network businesses. The use of benchmarking, to allow the regulator to compare the network business with a benchmark efficient business, was also supported by the Productivity Commission in its 2012 report into energy networks. We also note that the networks were involved closely in the AER’s 2013 better regulation program which developed the AER’s approach, so it defies logic for them now to be critiquing the analytical technique.